Why 'Overregulated' California Is Leading The Way

Ideologues hate it when the facts get in the way of their theories. California's Gov. Jerry Brown signed trailblazing legislation last week that commits the state to audacious greenhouse gas emission reductions by 2030 of 40 percent below 1990 levels. Not surprisingly, longstanding critics from the business community were howling once again about how California's business climate will deteriorate as a result.

The law extended efforts under California's previous cap-and-trade bill which set emission targets for 2020 to match 1990 levels.

Predictions of doom for the California economy are a perennial staple of California politics. But is there any truth to them?

First, here are the bald facts. Growth of California's 'overregulated' economy has frequently exceeded the U.S. economy as a whole since 1998. Annual growth in gross domestic product shown in the linked graphs is not a perfect measure of economic vitality, but it shows that fears that California is somehow stunted by its so-called excessive regulatory and tax burden isn't supported by the growth numbers.

Moreover, states that rank highest in typical business-oriented think tank ratings such as North Dakota and Wyoming saw their economies shrink by 6.7 and 2.9 percent respectively in 2015 as California led the nation with an expansion of 4.2 percent. Of course, North Dakota and Wyoming were hit hard by the decline of oil prices as their economies are largely extractive. California's economy is far more diverse.

It's probably true that carbon emissions-intensive industries will now think twice about expanding their presence in California. But those industries aren't really the future that California is seeking.

Instead, the state is becoming a leader in solar and wind energy and energy efficiency technology and policy. These are cutting edge industries that other states should envy California for. One has to look no further than the coal industry to see what's in store for the fossil fuel industry as a whole and the economies that rely on them. As carbon emission rules grow more stringent, the sun is setting on those industries that don't adapt.

That puts California in the vanguard of adaptation forcing California businesses to adapt and innovate--yes, innovate. Regulatory pressures actually spur business innovation and investment, creating jobs and new wealth. And, that innovation makes California a magnet for business investment as it extends its leadership as a worldwide provider of cutting-edge technologies, energy-related and otherwise.

The classic business example of regulation leading to leadership in the past has been U.S. government regulation of pharmaceuticals which made drugs developed by American companies acceptable worldwide because of the reputation of U.S. regulators. (That reputation has been tarnished in more recent times, but that's another story.)

So, it turns out that adapting to lower carbon emissions is moving jobs and investment into California and giving it an edge.

There are, of course, many reasons California has prospered so much despite its often cited reputation as anti-business. First, people like living in the state's pleasant climate. That attracts a lot of smart people who want to live someplace nice. Second, California has some of the world's top private and public universities at the center of technology research and development. Third, California's public services and infrastructure attract people who want to live in a state that values these. The state also attracts industries that need the well-maintained ports, roads and public services that make businesses prosper.

Fourth, the state's ethnic and cultural diversity is part of what attracts what researcher Richard Florida calls the "creative class" that drives innovation. This class is drawn to locales by his three "T's": talent, tolerance, and technology. California has all these in abundance.

Success begets success. The factors that make California such an economic success story are not easy to emulate. A comfortableness with diversity is a cultural trait that develops over time, but only in areas that are open to newcomers who are unlike current residents. Top-notch universities and research cost money, often a lot of public money--as do infrastructure and public services. High taxes are required to support these public expenditures.

Some advantages, of course, can't be emulated. North Dakota can't offer the beauty of the California coastline, nor California's mostly mild winters.

There are certainly things one can complain about in California--the smog, the traffic in large urban areas and the regulation of many aspects of California life and business not found in other states. And, it is true that some of California's extensive public infrastructure needs repair, updating, and replacement. But, that's true of every state in the union.

And still, people keep moving to California and entrepreneurs keep forming businesses there and prospering. They must see something that business-aligned think tanks just don't get.

Kurt Cobb is an author, more

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